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Mar 08

Is Your Non-Disclosure Agreement a Non-Compete Agreement in Disguise?

Posted by Robert T. Denny

A properly crafted non-disclosure agreement can go a long way in protecting your company’s trade secrets and other confidential information. At the same time, there are limits to what these agreements can and should seek to accomplish. For instance, while it might seem intuitive to include provisions preventing employees from working for a competitor if they have accessed your company’s trade secrets, such provisions may be unenforceable if they don’t comply with your state’s laws on non-compete agreements.

A recent case from the South Carolina Court of Appeals illustrates this point. Joshua Fay, Appellant-Respondent, v. Total Quality Logistics, LLC, Respondent-Appellant., No. 2014-001828, 2017 WL 798496, at *5 (S.C. Ct. App. Mar. 1, 2017).  There the court addressed whether a company’s non-disclosure agreement violated the public policy of the state because it contained provisions limiting where employees could work post-termination. The agreement broadly defined the company's "confidential information" and provided that the employee was bound by its terms indefinitely. It went on to state that if the employee worked for a competitor "in a position similar" to his position at the company, it would “necessarily and inevitably result" in the employee "revealing" or "using" the employer's confidential information in violation of the non-disclosure agreement.

The employee challenged this non-disclosure agreement in court, arguing it was a non-compete agreement in disguise and did not comply with the state’s laws governing non-compete agreements. The South Carolina Court of Appeals agreed. It reasoned the non-disclosure agreement restricted the employee's "right to use his talents to earn a living for an indefinite time period, if not forever." In South Carolina, like most other states, non-compete agreements are only valid if they have reasonable duration requirements, such as one- or two-years. Because the non-disclosure agreement did not meet that requirement, the court held the entire agreement violated public policy and was unenforceable.

This case serves as a reminder to businesses that if they want to restrict their employees’ from working for a competitor, they need to go about it the right way. The law treats non-compete and non-disclosure agreements differently, and to avoid unintended consequences, it’s generally a good practice to keep such provisions separate. 

Contact any one of our SCM attorneys with experience dealing with non-compete agreements: Keith A. Call, Maralyn M. English, or Robert T. Denny.